Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether one should take into consideration the business of the partnership when determining whether all of the corporations that are partners in a partnership meet the principal business test set out in paragraph 1100(12)(a) of the Regulations for purposes of determining whether a partnership qualifies for the exemption under paragraph 1100(12)(b) of the Regulations.
Position: Yes.
Reasons: The courts have indicated that a partner is deemed to carry on the business of a partnership.
XXXXXXXXXX
2011-040901
J. Gibbons, CGA
January 10, 2012
Dear XXXXXXXXXX :
Re: Paragraph 1100(12)(b) of the Income Tax Regulations (the "Regulations")
This is in reply to your letter dated June 6, 2011, concerning the exception in subsection 1100(12) of the Regulations to the capital cost allowance restriction rules in subsection 1100(11) of the Regulations. In particular, you wish to know whether the "principal business real estate corporation test" in paragraph 1100(12)(b) of the Regulations (hereinafter referred to as the "PBREC test") for partnerships to qualify for the exception in subsection 1100(12) should be applied on the basis that any business carried on by partnership is considered to be carried on by the corporate partners.
In your letter, you refer to a number of previous opinions issued by us in this issue (the "Previous Opinions"), including 9205705 and 57502, but, as you noted, those letters appear to address the situation where the only property of the corporate partners are their interests in the partnership. Thus, you believe that it is not clear how the PBREC test should be applied where the corporate partners own other property. For example, you describe a similar scenario to the one set out in our Previous Opinions except that a corporate partner in this case holds bank deposits or other property, the income from which would represent no more than 10% of its income. You would like confirmation that, in such circumstances, so long as the two-part test described in the Previous Letters is met, the exception in Regulation 1100(12) would apply. You would also like know whether the fact that a partner is a limited partner would affect the answer.
Our views
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
Paragraph 1100(12)(b) of the Regulations provides an exemption to subsection 1100(11) of the Regulations if the partnership was throughout the year "a partnership each member of which was a corporation described in paragraph (a)," i.e., "a life insurance corporation, or a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it."
In the Previous Opinions, we expressed the view that corporate partners would meet the PBREC test in paragraph 1100(12)(b) of the Regulations provided that:
(i) the principal business of the partnership throughout a particular year was the leasing, rental, development or sale, or any combination thereof, of real property owned by it and
(ii) throughout the particular year referred to in (i) above, the principal business of each corporation was the holding of its interest in the partnership.
Although, as noted above, the fact situation in the Previous Opinions indicated that the only property held by the corporate partners were their interests in the partnership, the requirement set out on line (ii) did not preclude corporations from holding other property. Further, the position in the Previous Opinions is based on the legal principle established by the courts that a partner, whether that partner is a general partner or a limited partner, is considered to carry on the business of the partnership. (See, for example, The Queen v. Robinson et al., 98 DTC 6065.)
In regard to the reference in paragraph 1100(12)(a) of the Regulations to "real property owned by [the corporation]," it is our view that this qualification was included to ensure that the leasing, rental, development or sale of real property, or any combination of these activities, carried on by a particular corporation with property owned by another corporation should be excluded when determining whether a corporation was a PBREC. Consequently, it is our view that this phrase should not be interpreted to mean that a corporate partner should exclude any business of a partnership in which the corporation is a member, notwithstanding that such business may be carried on using the partnership's property. Rather, we believe that the PBREC test should respect the legal principle that a partner is deemed to carry on the business of the partnership.
Ultimately, the determination of whether a corporation meets the PBREC test is a question of fact that involves the consideration of various factors, which might include, but is not limited to, the principal source of the corporation's income. In this regard, reference may be made to paragraph 7 of IT-371, Rental Property - Meaning of "Principal Business," which indicates that the significant factors of each case must be searched out and evaluated, including the following factors:
(a) the profits realized by each of the businesses;
(b) the volume and the value of the gross sales or transactions of each business;
(c) the value of the assets of each business;(d) the capital employed in each business; and
(e) the time, attention and effort expended by the employees, agents or officers in each business.
We trust these comments will be of assistance.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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